Fed’s Inflation Fight Crushes Rate Cut Hopes: What It Means for Markets in 2025
Digital Asset Market: Bitcoin's consolidation phase between $90,000 and $100,000 has been causing fluctuations in investor sentiment, with the cryptocurrency falling below $90,000 on Monday and jumping over 8% to reach $96,500 on Tuesday. Fundstrat's head of research, Tom Lee, sees this correction as typical for a volatile asset like Bitcoin and points out that it is currently down 15% from its recent highs. The asset's maturity is evident in its relatively mild drawdowns of 15%-20% compared to previous bull markets. Lee believes that $70,000 is a crucial support level. Despite the short-term correction, Lee remains bullish on Bitcoin's long-term potential, projecting $200,000 to $250,000 end-of-year targets.
Macro Economics: The Trump administration faces conflicting ideas for implementing tariffs when the president-elect takes office, causing confusion and sending mixed signals to markets. Different plans include gradually implementing tariffs, limiting the blanket tariff promises, and using a national economic emergency declaration. The divided opinions within the Trump world may not align with the president-elect's desire for a "bang" in his initial actions and could lead to negative economic consequences. The idea of gradually implementing tariffs, the latest to surface, may not provide enough reassurance to markets and could push up prices over a more extended period. Other proposed ideas have significant downsides, such as being legally challenged or reversing a key campaign promise. Despite pushback from Trump denying that his tariff plans will be pared back, it remains uncertain how the president-elect will ultimately choose to move forward with tariffs.
Equities: Stocks slipped on Tuesday as investors awaited the release of U.S. inflation data, with the Dow Jones Industrial Average falling around 0.2%. The S&P 500 and the Nasdaq Composite also fell, with declines seen in big tech stocks like Nvidia and Meta Platforms. Earlier in the day, the market showed some optimism after a lighter-than-expected producer price index report was released, showing only a 0.2% increase in wholesale inflation in December. However, traders are now waiting for Wednesday's consumer price index report to understand the Federal Reserve's success in targeting a 2% inflation rate. If CPI comes in higher than expected, it could signal slower interest rate cuts by the Fed. Earnings season will also kick off this week, with banking giants like JPMorgan Chase, Citigroup, Goldman Sachs, and Wells Fargo reporting on Wednesday. At the same time, Morgan Stanley and Bank of America are scheduled to report on Thursday.
The Fed and US Treasury: All eyes are on the consumer price index (CPI) report, which is set to be released on Wednesday. The market is expected to move significantly in either direction. Banks have changed their forecasts for future rate cuts by the Federal Reserve, with some even predicting no cuts. Concern about sticky inflation and the Fed’s path to contain it has pushed the VIX toward 20, which signals concern among traders, as the S&P 500 wiped out its gains for the year. The CPI will provide some clues on the Fed’s interest-rate path, which ranges from 0-2 cuts in 2025, in our opinion.
Geopolitical: The Chinese government is considering having Elon Musk acquire TikTok's U.S. operations to prevent the popular social media app from being effectively banned. This contingency plan is one of several explored options as the US Supreme Court decides whether to uphold a law requiring China-based ByteDance to divest from TikTok's U.S. business by January 19. It is unclear if ByteDance knows these discussions and Musk's potential involvement. The Chinese government is also discussing a possible resolution with President-elect Trump as part of larger negotiations with the new administration. The Supreme Court appears to favor the ban, but TikTok may turn to Trump, who favored a TikTok ban during his first administration but has since flip-flopped on the matter. This change in Trump's stance may be linked to his meeting with billionaire investor Jeff Yass, who owns a stake in both ByteDance and Truth Social, Trump's new social media platform. Owning TikTok and X will make Musk even more influential in US politics.
In other news, Oil prices slipped from a five-month high as progress in ceasefire talks between Hamas and Israel helped ease concerns over potential disruptions in oil supplies. Comments from President-elect Donald Trump and President Joe Biden supported the talks. The relative strength index showed that oil futures were overbought, and algorithmic investors were showing signs of buying exhaustion. The new US sanctions on Russia have not caused any disruption, and the tariff concerns on Canadian Oil have also been reduced—all signs of softening Crude Prices.
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View from our desk
Crypto markets remain directionless, with Bitcoin hovering at $96,000. Tomorrow’s CPI release could act as a pivotal trigger, potentially swinging prices 5% in either direction. We lean slightly optimistic, anticipating a cooler CPI figure of around 0.2% compared to last month. If this forecast holds, it could provide a modest boost to crypto markets, offering a respite from recent uncertainty.
Traditional financial markets face similar challenges, with inflation firmly at the forefront of Federal Reserve concerns. The Fed’s commitment to a 2% inflation target makes rate cuts in 2025 increasingly unlikely, a sentiment reflected in U.S. Treasury yields—5-year yields at 4.6% and 3-year yields at 4.4%. The persistence of elevated inflation suggests that monetary tightening will remain a defining theme, casting a long shadow over economic outlooks and financial policy.
Amid this backdrop, it remains uncertain how former President Trump plans to advance his tariff initiatives and immigration reforms. These measures could face significant headwinds, particularly in an environment where inflation and monetary policy dominate both public and market narratives. The interplay between these dynamics will likely shape economic and policy debates in the coming months.
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The 1Konto Team
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